Veteran banker leads Northeast Bancorp to new prosperity

"We believe that this reorganization is in the best interest of our company," Northeast Bank President and CEO Richard Wayne, shown in 2017, said in a statement. Staff photo by Carl D. Walsh

Northeast Bancorp of Lewiston, one of Maine’s oldest community banks, is enjoying newfound prosperity under the leadership of a banking veteran who has taken the business in a new direction.

When Northeast Bank President and CEO Richard Wayne stepped into the picture in 2010, the bank – founded in 1870 – was undercapitalized and had recently borrowed more than $4 million from the federal government under the recession-era Troubled Asset Relief Program. During the 12-month period ending June 30, the bank’s assets surpassed $1 billion for the first time, increasing by 9.5 percent from $986 million the previous year to $1.08 billion. Meanwhile, its net income increased by nearly 62 percent from $7.6 million to $12.3 million.

The growth was achieved by greatly expanding Northeast’s loan portfolio while it has continued to operate as a full-service community bank. Two particular areas of focus for the bank and its 190 employees have been commercial loan acquisition and U.S. Small Business Administration loan origination, Wayne said.

“We try to look for niches where we have a competitive advantage,” he said.

Among Maine-chartered banks, Northeast had risen to seventh largest by assets as of Dec. 31, 2016, compared with 13th largest four years earlier when its assets totaled just under $700 million, according to Federal Deposit Insurance Corp. data.

A NEW STRATEGY

Wayne’s professional background is unusual for the top executive of a community bank. He is a lawyer and certified public accountant who co-founded a Boston bank called Atlantic Bank & Trust in 1987. When a recession threatened to put the bank out of business in the early 1990s, its business model was altered to take advantage of the economic slump. The bank, renamed Capital Crossing Bank, began buying up and servicing commercial mortgages issued by other, failed banks.

The refocused company became hugely successful and was sold to now-defunct financial services giant Lehman Bros. in 2007 for $210 million. It split off from Lehman in 2008 and is still in business under the name Capital Crossing Servicing Co.

Wayne and a small group of investors began looking in 2009 for another bank to purchase in order to replicate the Capital Crossing business model.

A year later, they purchased a controlling interest in Northeast for about $30 million. At the time of its acquisition, the bank was trying to be a one-stop shop for its customers, with many divisions including insurance, trust management and personal investing. Wayne said some of those businesses were expensive to operate and not very profitable.

Still, he said Northeast met all of the basic criteria the investors were looking for: Its fundamentals were solid, it was relatively close to the investors’ Boston home base, and the bank’s owners were willing to sell at a fair price.

The investors set about sharpening and shifting the community bank’s focus to more profitable areas of finance. One thing they agreed on was that the insurance division had to go.

“It tied up a lot of capital, and it wasn’t making a lot of money,” Wayne said.

So they sold the division, which had employed about 60 people, to an insurance company for $8.5 million, he said, adding that more than 50 of those employees ended up keeping their jobs.

In addition, the personal investment unit was closed, and its 15 employees were allowed to convert it into an independent business.

“We essentially gave them the business and let them go off on their own, which they did,” Wayne said.

Next, the team set about setting up a unit focused on buying and servicing commercial loans originated by other banks. Wayne said there is a secondary market for such loans that allows financial institutions to buy them at a discount even if the borrower is in good standing.

Wayne said the bank was interested in acquiring those loans because there is less competition, his team has experience choosing loans that are less likely to default and pricing them correctly, and such loans have proven highly profitable for them in the past.

While a decent annual percentage yield on a newly originated commercial loan might be 6 percent, Northeast’s average yield on its purchased loans during the past year was more than twice that at 12.3 percent, he said.

The boost in profit comes from discounting, Wayne said. The bank pays less than the loan’s remaining balance to acquire it, but the borrower is still responsible for repaying the full amount. Northeast also generates additional revenue from servicing the loans.

LOAN GROWTH

Securities analyst Brad McCurtain, president of Portland-based Maine Securities Corp., said it is difficult to assess Northeast’s long-term prospects as a community bank because of its unusual focus on buying up commercial loans. However, McCurtain noted that he holds shares in the company, and that its stock price has been on an upswing recently. The price of Northeast shares, which trade on the Nasdaq exchange under the symbol NBN, has nearly doubled over the past year. As of 4 p.m. Wednesday, its stock price was $21.25 per share.

“I’ve watched the bank’s stock climb to the highest level it’s been in over a decade,” McCurtain said.

The other key to Northeast’s recent growth has been its foray into SBA lending. In 2014, the bank launched an SBA lending division to complement its commercial loan acquisition business.

SBA loans are designed to improve access to capital for businesses that otherwise might not be able to obtain credit. They differ from conventional business loans in that the SBA guarantees the lender repayment of a portion of the loan – as much as 90 percent – if the borrower defaults. The guaranteed portion also can be bought and sold on the secondary market like other types of securities.

The SBA lending division has made it possible for Northeast to acquire more commercial loans, thus growing the bank’s most profitable business unit. Federal regulations limit the portion of a bank’s loan portfolio that can be made up of purchased loans to 40 percent. Therefore, in order to buy $4 million worth of existing loans, the bank must originate another $6 million worth of new loans.

In its most recent quarter, Northeast generated loan volume of $152 million, which included $113 million worth of acquired commercial loans, $19 million worth of SBA loans, and just over $20 million in residential and commercial community bank loans.

“The growth of our balance sheet and earnings complements our growth strategy and positions us well for the future,” Wayne said.

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